The gradual evolution of buyer--seller networks and their role in aggregate fluctuations

TL;DR

This paper studies how buyer-seller networks among firms evolve over time, influenced by productivity shocks, and how these networks impact individual firm growth and overall economic fluctuations.

Contribution

It introduces a longitudinal network model showing how firms' local decisions shape network evolution and influence aggregate economic fluctuations.

Findings

Network evolution reflects firms' local decisions to mitigate risks.

Link renewal positively impacts firm growth rates.

Networks play a significant role in aggregate economic fluctuations.

Abstract

Buyer--seller relationships among firms can be regarded as a longitudinal network in which the connectivity pattern evolves as each firm receives productivity shocks. Based on a data set describing the evolution of buyer--seller links among 55,608 firms over a decade and structural equation modeling, we find some evidence that interfirm networks evolve reflecting a firm's local decisions to mitigate adverse effects from neighbor firms through interfirm linkage, while enjoying positive effects from them. As a result, link renewal tends to have a positive impact on the growth rates of firms. We also investigate the role of networks in aggregate fluctuations.